Professional Documents
Culture Documents
People commit crimes because they can make outsized gains relative to the risk.
If some firms invest heavily in areas that benefit an entire industry while others in that industry abstain, a free rider
problem emerges. The firms who contribute put themselves at a cost disadvantage against their competitors. The tourism
industry which includes some agencies who contribute to conservation and others who do not suffer from a free rider
problem.
Adam Smith noted that It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner,
but from their regard to their own interest. Meaning that incentives matter. When we benefit directly from our work, we
work harder.
In systems that do not rely on markets, personal incentives are usually divorced from productivity. Firms and workers are
not rewarded for innovation and hard, nor punished for sloth and inefficiency.
Government bankrolled businesses and American public education suffer from personal incentives being divorced from
productivity. The pay of teachers is not linked in any way to performance. Whereas in other areas, such as Silicon Valley, if
firms do not contribute value to the market, they fail and shut down.
The standardized pay of teachers creates a set of incentives referred to as adverse selection. The most talented teachers
are likely to be good at other professions where pay is more closely linked to productivity. Studies show that the most
talented teachers are the most likely to leave the profession early because incentive structures leads them elsewhere, the
creating incentives for employees to game the system in ways that damage the company in the long run.
Economics teaches us how to get the incentives right.
Rational individuals acting in their own best interest can make themselves worst off. Fishermen who hunt without
constraint can deplete a fish population. The only incentive is to kill as many fish as they can when no one trusts anyone
the blacksmith, seamstress and telegraph operator, respectively. In a market economy, creative destruction must happen.
Government intervention to minimize the pain inflicted by competition slows the process of creative destruction. American
automakers could have been made stronger in the long run if they faced foreign competition head-on instead of seeking